Chapter 5 – Health Care Costs

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FAST FACTS

National health spending grew 4.8 percent in 2016 (down from 5.8 percent the previous year), to reach a total of $3.4 trillion, according to national health expenditure estimates (source).

Despite the moderation in spending growth in recent years, the United States spends more on health care than any other nation, estimated at 5 percent of its Gross Domestic Product (GDP) in 2014 (source).

Federal spending for the major health care programs—Medicare, Medicaid, the Children’s Health Insurance Program (CHIP), and subsidies offered through health insurance exchanges, as well as related spending, totaled $936 billion in 2015, an increase of $105 billion (or about 13 percent) from the previous year (source).

In 2015, 25 percent of privately-insured individuals had unaffordable health care costs using the Commonwealth Fund definition. This marked a drop from 2014, when 27 percent of individuals had unaffordable health care costs (source).

Total national out-of-pocket expenditures grew 3.6 percent in 2016, following slower growth of 2.6 percent a year earlier. This trend is primarily attributed to greater cost sharing, as more people get coverage through high-deductible health plans (source).

There were a record number of health industry mergers in 2015, totaling 936 transactions valued at $175 billion, compared to 765 transactions worth $62 billion in 2014 (source).

BACKGROUND

Overall, health care spending growth, or the percent increase in health care expenditures from one year to the next, has moderated in the United States since 2009. National health spending includes everything from government expenditures on programs such as Medicare and Medicaid to consumer spending on insurance premiums, deductibles and prescription drugs. National health expenditure data from the Centers for Medicare and Medicaid Services (CMS) estimates that U.S. health care spending grew 4.8 percent in 2016 to reach a total of $3.4 trillion (source). Through 2025, national health spending is projected to rise at an average rate of 5.6 percent — 1.2 percentage points faster than growth in the gross domestic product (GDP) – and to grow to represent 19.9 percent of the total economy by 2025. These projections assume no change in current law as of March 2017 (source).

Despite more moderate spending growth in recent years, the United States spends more on health care than any other nation, estimated at 17.5 percent of GDP in 2014 (source). Switzerland the next-highest spender, dedicated 11.4 percent of its GDP to health care during the same year (source).

Between 2004 and 2009, annual spending growth for health care in the U.S. averaged 5.3 percent, but dropped to 3 percent in the three years following, though there was a slight growth in the spending rate between 2013 and 2014. The reasons behind this moderation have been hotly debated, but health care analysts cite the Affordable Care Act (ACA), increased cost sharing, and the 2008 economic recession as contributing factors.

According to national health expenditure data, the growth rate in 2016 (4.8 percent) was slower than the prior year (5.8 percent), with a projection for growth to tick upward in 2017, to a rate of 5.4 percent (source). While some economists predict that a slower growth will continue, citing changed consumer behavior during the economic downturn, skeptics argue that a similar pattern in spending growth during the 1990s was short lived.

Looking forward, over the next decade, the primary drivers of national health spending and coverage trends are expected to be increases in economic growth, faster growth in medical prices and population aging (source).

Policymakers are focusing increasingly on higher spending on prescription drugs, and potential means of achieving value-based pricing. Spending in this area is rising due to population growth, an increase in prescriptions per person, economy-wide inflation, price increases and the movement toward higher-priced products (source).

Spending on prescription drugs in the United States totaled about $457 billion in 2015 (16.7 percent of personal health care services). Prescription drug spending is expected to grow by an average of 7.3 percent annually between 2013 and 2018 (source).

The recent increase in prescription drug expenditures marks a reversal from a decade ago, when more lower-cost generic drugs — but fewer blockbuster drugs — entered the market. From 2009 to 2012, drug spending grew at about 2 percent each year (source).

FEDERAL SPENDING

Federal spending for the major health care programs — Medicare, Medicaid, the Children’s Health Insurance Program (CHIP), and subsidies offered to lower-income individuals who obtain coverage through the insurance marketplaces, as well as related spending — totaled $936 billion in 2015, an increase of $105 billion (about 13 percent) from the previous year. This number is projected to have increased further to $1 trillion, in 2016 (source). Between 2016 and 2046, federal spending on Medicare and Medicaid, as a share of GDP, may rise from 6 to 10 percent (source).

Medicare

Net Medicare spending is projected to grow from $591 billion in 2016 to $1 trillion in 2026 (source). Medicare per capita spending is projected to grow at a faster rate between 2015 and 2025 (4.3 percent) than it did between 2010 and 2015 (1.4 percent), but slower than between 2000 and 2010 (7.4 percent) (source).

In 2015, nearly one-quarter of Medicare spending on beneficiaries was for inpatient services, 12 percent was for the Part D prescription drug benefit, and 11 percent was for physician services; another 27 percent was for Medicare-covered services provided by Medicare Advantage plans (source).

Prescription drug spending has increased for Medicare recently. Total and per capita spending for Part D, Medicare’s prescription drug program, has increased over the last few years, due primarily to Hepatitis C treatments, and is projected to continue on an upward trajectory as an increasing number of high-priced specialty drugs come to market. Prescription drugs account for $1 in every $6 of Medicare spending (source).

Looking forward, the aging of the population and overall health care spending growth is expected to place financial pressure on the Medicare program. The first of the baby boom generation became eligible for Medicare in 2011, when approximately 40 million Americans were over the age of 65. By 2030, that number will have grown by more than 30 million, and by more than 40 million by 2040 (source). Although a significant portion of Medicare is financed through payroll taxes (37 percent in 2015), funding from the workforce is not expected to keep pace with the aging population (source). Policy makers on both sides of the aisle are likely to continue to look for ways to address the spending and financing challenges facing Medicare through options to reduce Medicare spending growth, increase revenues, or some combination of both (See Medicare section).

Medicaid

Medicaid spending increased 12 percent (to $554 billion) in 2015, due, in large part, to an increase in enrollees, according to CMS actuarial estimates. Under the ACA, the federal government covered 100 percent of the expansion costs for states from 2014 to 2016. CMS estimates that the federal government spent an estimated $348 billion on Medicaid in 2015 (an increase of 16.2 percent), while states spent an estimated $207 billion (an increase of 5.9 percent) (source). Moving forward, Medicaid spending is expected to grow more slowly. From 2015 to 2024, Medicaid spending is projected to grow an average of 5.8 percent per year (source).

The costliest Medicaid beneficiaries are the elderly and persons with disabilities. In 2011, prior to implementation of the ACA, the elderly made up only 9 percent of the population covered by Medicaid, but accounted for 21 percent of Medicaid costs, and individuals with disabilities made up 15 percent of the Medicaid population but accounted for 42 percent of program costs (source).

A large portion of Medicaid spending involves coverage for individuals enrolled in both Medicare and Medicaid, also known as dual eligibles. Medicaid pays for services not covered by Medicare, such as long-term services and supports, and helps pay for premiums and cost-sharing (source). Although children make up nearly half of enrollees, they account for only 21 percent of costs (source).

States have implemented various Medicaid strategies to achieve better care delivery and to lower spending. Some of these initiatives expand managed care models, which states have increasingly relied on since the 1980s, although many states vary in their approach and scope (source). Other initiatives include telemedicine and the adoption of new ways to coordinate care through, patient-centered medical homes and accountable care organizations.

With those people who are dually eligible for both Medicare and Medicaid making up a small percentage of the Medicaid population but consuming a large portion of the program’s costs, many states have implemented demonstration projects through the federal government that seek to control costs and improve quality by improving how the programs work together. As of December 2015, 13 states had finalized memorandums of understanding (MOUs) with CMS to implement 14 demonstrations (source).

CONSUMER SPENDING

Out-of-pocket health care expenditures for individuals have remained fairly stable in recent years, although premiums for health plans purchased as part of insurance marketplaces are on the rise. Total national out-of-pocket expenditures grew 2.6 percent in 2015, following slower growth of 1.3 a year earlier. This trend is expected to continue for a few years, as more people get coverage through high-deductible health plans (source).

Out-of-pocket spending includes premiums, co-payments, deductibles and other spending for medical services that insurance does not cover. A Commonwealth Fund study of health care in 2015 found that 25 percent of privately-insured individuals had unaffordable health care costs (premiums equaling 10 percent of income, or more than 7 percent of income if considered low-income, and deductibles equaled 5 percent or more of income). This marked a drop from 2014, when 27 percent of individuals had unaffordable health care costs (source).

Insurance Marketplaces

Private insurance purchased through federal or state marketplaces was the subject of significant attention during 2016, as several large insurers scaled back their offerings in some areas for 2017. Compared to an average increase of 2 percent and 7 percent in 2015 and 2016 respectively, 2017 will see an average premium hike of 25 percent in federally-run marketplaces (source). That has prompted debate about possible policy action – from legislators in both parties – to ensure stability of the marketplaces.

Nearly 3 million people in states that have not expanded Medicaid fall within a so-called coverage gap. They neither qualify for Medicaid nor for marketplace subsidies, and have remained uninsured (source). Federal subsidies for marketplace plans are available to individuals with yearly incomes between the federal poverty line and four times that amount. Some of these people might have qualified for Medicaid, except that a 2012 Supreme Court ruling stating that forcing states to pay for the expansion was unconstitutional (source). As of July 2016, 19 states have not expanded Medicaid (source).

Once in a marketplace, an individual may be directed a number of ways. Those with incomes lower than 138 percent of the federal poverty line may be referred to Medicaid. If the individual’s income is less than four times the federal poverty line, he or she may be eligible for subsidies in the form of tax credits to help purchase a private plan.

Employer-Sponsored Coverage

Overall, total health costs per employee increased by 3.9 percent in 2014 and 3.8 percent in 2015. They are expected to increase by 4.3 percent in 2016 (source). Costs were estimated to rise by 6.3 percent if employers made no changes to their current plans (source). Some employers are devising new systems and incentives to keep costs down, while others are simply placing more of the cost burden on the consumer (source).

In 2016, the average annual premium for employer-sponsored coverage was $6,435 for an individual (similar to 2015) and $18,142 for a family (up 3 percent from 2015 and 58 percent from 2006) (source).

Health insurance premiums are rising at a faster rate than employees’ salaries. Since 1998, premiums have tripled while wages have risen by only 58 percent (source). Employees rarely pay the full cost of their premiums, however. Firms differ in the amount of the premium they contribute toward employee coverage. In 2016, employers covered approximately 70 percent of employees’ premiums for family plans and 82 percent for individual plans (source). But much research by economists indicates that increased employer contributions are shifted to employees through lower wage increases.

Increasingly, employers are trying new ways of delivering care, in an effort to improve health and lower costs. Some are offering workers the opportunity to complete health risk assessments or biometric screening or to participate in lifestyle coaching or other health promotion programs; many large employers provide employees with financial incentives to complete assessments or participate in programs. Employers also are covering services through new venues, such as retail health clinics and telemedicine, sometimes providing financial incentives for employees to use these new options. Thirty percent of large employer plans included telemedicine benefits in 2015, up from 18 percent a year earlier (source). Some wellness and other programs are tied to incentives and penalties designed to help employees make healthy lifestyle choices (source).

Employers also continue to transfer increased costs to employees. The amount the employee must pay for medical services before insurance picks up the cost, found most often in the form of deductibles, copays, and coinsurance rates, is rising. The average deductible was $1,478 for individual plans in 2016, up from $1,318 the year before (source).

One out-of-pocket expenditure, for health insurance premiums, is rising at a faster rate than employees’ salaries. Since 1998, premiums have tripled, while wages have risen by only 58 percent (source). Employees rarely pay the full cost of their premiums, however. Firms differ in the amount of the premium they contribute toward employee coverage. In 2016, the average annual premium for employer-sponsored coverage was $6,435 for an individual (similar to 2015) and $18,142 for a family (up 3 percent from 2015 and 58 percent from 2006) (source). Employers covered only approximately 70 percent of employees’ premiums for family plans and 82 percent for individual plans (source). Employers also continue to transfer increased costs to employees. The average deductible was $1,478 for individual plans in 2016, up from $1,318 the year before (source).

In 2020, employers will be subject to a 40 percent excise tax on high-cost plans (source). The so-called Cadillac tax will impose stiff penalties on employers who offer high-cost insurance plans. Partly in response to Cadillac tax fears, employers have been increasing cost-sharing for employees for many years. The percentage of employers offering high-deductible plans with savings options has increased from 20 percent in 2014 to 29 percent in 2016 (source).

INDUSTRY CONSOLIDATION

In the 1990s, there was a wave of health care mergers as stakeholders grappled with ways to contain health care costs. Those health care marriages waned in the early part of the 2000s, and then accelerated again in the later part of the decade as the industry anticipated passage of the Patient Protection and Affordable Care Act (ACA) in 2010 (source) (source)

Enactment of the ACA has added financial pressure on hospitals, doctors and insurers in a variety of ways, including less in Medicare payments to hospitals, Medicare reimbursements that are pegged to quality standards, limits on administration costs for insurers under medical loss ratio rules that require 80 to 85 percent of premium dollars to be spent on care, and new payment models that emphasize coordination and management of patient care (source) (source).

While there has been considerable criticism of provider and insurer consolidation, with opponents citing harmful implications for consumers, including higher costs, others point to the merits and say that some amount of activity is necessary to reshape the health care industry in positive ways.

Indeed, insurers argue that some activity is necessary as the health care sector shifts from a fee-for-service model towards value-based payments. In addition to the expected benefits of consolidation generally, such as reducing administrative costs, acquiring complementary capabilities and acting on new synergies, they maintain that the acceleration of this shift, as well as the capability to move towards a more consumer-driven marketplace, has a positive effect on the health care system as a whole (source).

Some experts maintain that there is a contradiction in advocating for the policies that have driven provider consolidation but then condemning the mergers. Health care costs are rising at a historically low rate, and it is possible that policies that would reduce provider concentration could raise health care costs, they say (source).

There were a record number of health industry mergers in 2015, totaling 936 transactions valued at $175 billion, compared to 765 transactions worth $62 billion in 2014 (source). Notably, in 2015 Aetna announced its intention to merge with Humana (source), and Anthem similarly did so with Cigna (source). These mergers would consolidate the nation’s five largest health insurers into three. The companies announced that the mergers would allow them to have more pull in negotiating prices with hospitals and other providers. Many argue that such consolidation measures often result in increased profits for the companies but rarely result in any cost savings for consumers. In July 2016, the U.S. Justice Department filed a lawsuit to block the both mergers, citing concerns that the combinations would harm competition nationwide and would give too much market power to three largest insurers (source).

EXPERTS

Drew Altman, president and CEO, Kaiser Family Foundation, 650/854-9400

This guide was made possible with the support of the National Institute for Health Care Management (NIHCM) Foundation. This edition of the Sourcebook also had initial support from the Robert Wood Johnson Foundation.